Recession or Not - 2024/2025 play?
Sahm rule triggered but market is standing tall. What Is Happening?
Ciao Everyone,
Hope your portfolios are holding up well!
It has been nearly six months since my last update, and as I predicted, the economy seems to be slowing down - though I didn’t expect to see the gloom set in as early as Q3. Maybe Fed has been too restrictive?
Let’s dive into the latest data. The Sahm Rule has officially been triggered, which usually means we’re in or near a recession. But here’s the kicker—even Claudia Sahm, the rule’s creator, doesn’t think we’re in a recession yet. If you’re scratching your head and wondering what the Sahm Rule is, I highly recommend checking out her recent Bloomberg interview—it’s a good watch.
Now, the Fed did hint at a 25bps cut at their last meeting if inflation was under control. And while inflation has been relatively “under control,” there are growing calls for an emergency Fed meeting to tackle the slowing economy. It’s a bit like being caught between a rock and a hard place—I am not quite sure if the bigger worry is employment or inflation. Inflation is subdued at under 3%, but unemployment, now at 4.3%, is bucking the trend.
Let’s take a quick stroll down memory lane and see what happened during last 2 recessions.
The economy went in recession in late Q1 2001 (dot-com bubble) but S&P500 was already down by 10% in previous quarter. It is not too surprising as you can see from the charts below that economy was slowing down and markets were reacting in accordingly (I do know that I am skipping a lot here but it is intentional to focus on key points).
FYI - charts below are dynamic. Thank you
.Similarly, during 2008 recession (Global Financial Crisis), even though overall employment level was growing, employment growth was slowing down. On top of the slowdown, bankruptcy of Lehman Brothers in Sep-08 added fuel to the fire and it got worse from there on.
There is a common thread here? Both recessions happened within six months of Fed cutting rates. During both cycles, Fed manufactured slowdown (again, I am missing a lot of information here regarding both recession so do read about both cycles).
Looking ahead - 2024/2025 Play?
Covid has disrupted all of the data and flow so, we can’t exactly rely on data from 2020 - 2022. We have 18 months of “reliable” data but it does paint a picture - a picture of slowing economy. Employment levels did surge in 2023 and YoY levels are up 2.5m but growth is slowing down as visible in the charts below.
Do note that we’re working with preliminary numbers from employment surveys so we have to take them with a spoon of salt and rather rely on the trend instead.
A Quick Look at Banks
All four major banks have a stable or growing loan portfolio, though their net charge-off rates are rising at around 50% YoY. Credit card loan growth has been positive across the board, but it looks like they’re tightening the screws with more stringent policies—30+ days delinquency rates have remained relatively stable. The consumer is clearly feeling the pinch, which, let’s be honest, was kind of the point of higher interest rates.
(Quick note: The data for Citi is specifically of their Branded cards.)
Given the lack of clear data, my take is that we’re in the early to mid stage of a slowdown. Could this morph into a recession? Sure, but based on what we’re seeing from banks (and airlines), I’m not betting on it just yet.
So, where does that leave us? I’d say we’re in a Fed-manufactured slowdown, and it’s probably best to keep a close eye on the data as it rolls in. In fact, I think I could be proven wrong within next 2-3 months as new data rolls in. I won’t be surprised at all if I have changed my outlook to recession by as early as next week as we get JOLTS and Credit Union performance data.
Let me know your thoughts - what’s your read on the situation? Are we on the brink of a recession, or just hitting a bump in the road?
And to end this note, here’s a nugget of wisdom from one of the prominent economists, John Maynard Keynes:
“Markets can remain irrational longer than you can stay solvent.”
Have a good one!